The
S&P 500
has surged in 2023 but the gains aren’t what they seem. They’re mostly due to a few individual stocks, Nvidia and Tesla among them, that have masked what’s been a pretty mediocre year for the stock market.
At first glance, the stock market appears to have done quite well in 2023. As of the close on June 20, the S&P 500 had jumped 14.3% in 2023. That’s well above the 10-year and 20-year average through that date of 3.6% and 3%, respectively, according to Dow Jones Market Data.
That’s also a major change from this time last year. As of June 20, 2022, the S&P 500 was down 23%. Rising interest rates, inflation, economic uncertainty, and fears of a recession were weighing on the stock market, specifically on the tech giants that make up a large portion of the index.
Those worries have eased, but not dissipated this year. While the Federal Reserve has temporarily paused its aggressive path of monetary policy, the Central Bank will most likely raise interest rates again as inflation remains stubbornly high. Recession concerns linger, and corporate profits may or may not recover in the year ahead. Still, the S&P 500 is on a tear.
The index’s rise this year has pushed the S&P 500’s market cap to about $39 trillion, which is up about $5 trillion year-to-date. But the index’s moves are mostly attributable to the “Big Seven” tech stocks:
Tesla
(ticker: TSLA),
Nvidia
(NVDA),
Meta Platforms
(META),
Apple
(AAPL),
Microsoft
(MSFT),
Alphabet
(GOOGL), and
Amazon.com
(AMZN).
Electric vehicle maker Tesla’s 123% rise through June 20 added $437 billion to the S&P 500’s market cap, while Nvidia’s 200% rise added $695 billion this year. The $1.1 trillion from those two companies has accounted for about three percentage points of the total year-to-date return of the index.
Exclude the rest of the Big Seven, and that $1.1 trillion is more than all other stocks in the index combined. Together, megacap tech has attributed almost 12% of the total gain to the S&P 500 this year. By excluding those seven stocks, the index would be up around 3% year-to-date, making it a truly average year.
The moves of these stocks can be attributed to investor excitement about artificial intelligence. Major tech companies have been racing to push out the hottest AI products, which experts believe will be the future of the industry. This has caused traders to buy up shares of the tech giants they had sold the previous year, leading to a rebound in the market and increasing valuations of these stocks.
But the major climb of tech stocks can also come crumbling down if the Fed gets more aggressive with rate hikes after its pause. That would be a problem for the overall market, which is riding the wave of these few stocks’ solid performances.
“With sentiment still ‘bullish’ and markets overbought, Powell could provide a modicum of support to the market’s advance, but if he suggests that he’s in the hawkish camp, markets may need to continue to unwind gains until a more viable catalyst emerges,” Quincy Krosby, chief global strategist for LPL Financial, wrote.
Many experts are informing traders to be mindful of the AI boom. This includes Paul Gray, managing partner of Ironhold Capital Management.
“For many companies, in a number of industries, AI has the potential to significantly improve productivity. However, just because a company uses AI doesn’t mean that the company now deserves an astronomical valuation,” Gray wrote. “…It’s unlikely that the recent surge in AI stocks is warranted and investors should consider all that has been discussed thus far before they jump on board the AI train.”
And that’s true whether you buy the individual stocks or the S&P 500.
Write to Angela Palumbo at [email protected]
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